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Mohd M. Billah, Ezzedine GhlamAllah and Christos Alexakis
This chapter analyses the special nature of banks, and how the importance of the banking sector and its stability overlaps with the preservation of competitive banking markets. Banks have a unique standing in the economy, and are regarded as more vulnerable to instability than other firms as they provide liquidity and are involved in inter-bank lending markets and the payment system. Due to the systemic nature of banks, governments try to avert a crisis that can affect the whole banking sector by ensuring that banks which are ‘too big to fail’ remain sustainable. Such intervention has a distortive effect on competition, as it prevents ‘self-correction’ of the market. State aid measures that characterized the response of regulators in the recent financial crisis were based on the premise of the special nature of the banking sector and its importance to the economy. In addressing the special nature of banks the chapter looks into the approach adopted towards banks under State aid control, tackling issues such as ‘too-big-to-fail’ and the BRRD and SRM.